For the last few years the “home equity line of credit” has gotten a lot of attention.
Home equity is the value of your home minus the remaining mortgage balance which is outstanding. While you live,and sleep in your home worrying about debts or wishing you could refurnish the living room you may be sitting on the cash that will grant your wishes.
Would You Want an Equity Line of Credit?
With a normal loan, which deposits a set amount of money in your account and begins charging you interest and payments at a fixed rate until repaid, a line of credit acts sort of like a credit card account. You do not need to pay interest on the full amount you have access to — only on the amount you have used. (And in some cases you then have access to the account again.)
When using an equity line of credit (also known as a HELOC) it gives you greater flexibility with the least cost. Not only can you access the credit only as you need it,your monthly payments will reflect only the balanced used. Some lines of credit have only the interest as the minimum payment which can be helpful when finances are tight. In some case you even have an option of paying just the intrest on the amounts used for a specific span of time.
An equity line of credit is great when you don’t have a large fixed amount to spend in one place that will take many years to repay and you want access to the credit without asking for a new loan when you have paid it back.
Do I have limits on what I can use the loan for???
We can all find lots of uses for a line of credit loan…but here are some of the most common examples.
Consolidate Debts
Use the home equity line to reduce or consolidate your other debt. Not only will this help your credit score…but it can help reduce your interest payments as well.
Take care of your “second” on your home.
Use your line of credit to pay off the existing mortgage for better interest rates.
Add too, remodel, or travel.
You may use your line of credit for renovating, buying new furniture or a car, or taking a vacation with less interest payments than using a credit card or store card making it a wise choice for large purchases.
Ok…so whats the Down Side?
While the before mentioned information sounds great…whats the rest of the it look like.
Some types of debt wont allow you to use a HELOC on them. Some student loans…or small business loans.
Other items like cars and vacations may seem like a good idea to buy with your home equity line of credit, but with the ability to pay only the interest you may find the motivation to pay off the debt is lacking and end up owing for items that have lost their value or were consumable. Plan to pay off the debt quickly for the most advantage.
A Second mortgage may not be a good idea depending on interest rates and your repayment terms. While lines of credit take advantage of current low interest rates you may find that your regular loans protect you better from fluctuating rates if you will not be paying the loan down in the next few years.
We all understand the freedom and relief that comes from having access to extra funds. For both those emergencies, as well as last minute purchases. However its important to understand the risks as well as benefits.
Related posts:
- Do You Really Need A Home Equity Line Of Credit?
- The Importance Of Employing A Real Estate Lawyer When Investing In A Home
- How Do I Decide Between a Home Equity Loan and Home Equity Line of Credit
- The Difference Between Home Equity Loans And Home Equity Line Of Credit
- How Does A Home Equity Line Of Credit Work?
